Chapter 12 – Controlling Costs

‘In a competitive market we don’t control the selling price. What we do control is the cost, and in the near term this reflects the efficiency and the effectiveness of our operations.’
An operations manager

Overview

The previous chapter considered capital spending. This chapter moves on to look at various ways of classifying, analysing, interpreting and projecting costs of all kinds. The main thrust is the management of costs relative to the bottom line – net profit. Accordingly, we will mainly review costs on an accruals basis, as discussed in Chapter 8. By and large, this is the closest that accounting comes to assessing costs in the way that a manager needs to look at them. Activity-based costing – a relatively new buzz phrase for old logic – is also considered and extended.

Mastering cost control

If you can answer the following questions after reading this chapter, you will be well placed to analyse and project costs:

Why do accountants and managers have various ways of classifying costs?
What do managers want to know about costs?
When analysing costs, should you focus on industry, product, geographic area or functional area?
Why divide functional costs into employee and non-employee costs?
How do you project costs?
When identifying production or operating costs, how do you account for capital spending and refundable deposits paid?
How can managers massage costs? Why would they do so?
As a manager, what tells you most about your costs: financial accounting, management accounting, cost accounting, or activity-based costing?
What is absorption costing? Is it accurate?
What is activity-based costing? Why is it important to managers?